SURANJANA BASU

It is reported that of the top 100 restaurant chains, 70 of them are controlled by PE fund. In this country too there’s a huge opportunity owing to the big market and a large customer base, but restaurant players are not hitting the bull’s eye. Why so? Why not the PE funding firms, which are more than willing to invest in the food service sector, not getting the right promoters? What do the investors expect from the promoters?

No clear data

Sumer Juneja, Vice President, Norwest Venture Partners India, comments, that the restaurant owner should have the clear idea about its business strategy with all the business data put on the table. “What’s your strategy? You need to know who’s your client, what you’re servicing, and what price point are you offering. When you meet the management there is no clear strategy, and if you don’t know your business, it is difficult for me to understand where you are going to be in five years. We are happy to support but need some sense of profitability on the economics. Let’s just take one of your stores opened up for more than two years, what you called steady store. At least that gives us some sort of comforter. Then we give them the money they can spend on people or organisation. They can replicate the same into 1000 stores. But in my experience, you try to get unit economics for one store and I don’t have the numbers,” regrets Juneja

Missing of right combination

The question we ask ourselves is – here is such a huge sector with millions and millions of restaurants and why is that only the international brands have been able to build something of substantial sizes here?

Jacob Kurian, Partner, New Silk Route Advisors Pvt Ltd, laments that the only significant Indian PE funding is Café Coffee Day. “I have today 100 million dollars committed to invest in the sector and we have been looking at this opportunity from 2006, and other than Café Coffee Day, we have not been able to find a single investable vehicle that came at that right combination of the right valuation, where we can make a sensible return, having the right back-end system processes, a promoter who understands that he wants to be part of much bigger opportunity, even if his share is not 90 per cent,” he comments.

There’s a basic drawback in the approach. The focus is majorly directed towards front-end. Also, restaurateurs are more intended to scale up revenue, as a result the model misses the bottom line focus.

Inept back-end operations

Hemendra Mathur, Managing Director, SEAF India Investment Advisors, emphasises on the corrections required at the back-end. “Not enough time is invested in developing vendors, developing processes and back-end operations, which include centralised kitchen, cold chain and warehousing.” The challenge also lies in steep valuation of restaurant business. Higher expectation of valuation is prevalent in the segment. “However, the investors can make money by growing revenues, margins or percentage sales and earnings before interests, and also by improving multiples,” opines Mathur.

Ignorance is hurting the business which can gain a lot from PE funding. Samir Kuckreja, Managing Director, Nirulas Pvt Ltd, sheds a light on how PE funding brings in newer ways to analyse the business. “Navis, a PE fund, is a co-investor with me in Nirula’s and has an interesting perspective because they also own KFC in Hong Kong and Dunkin’ Donuts in Thailand. So, a PE fund actually guides your way to look at costs and efficiency, causing the overall improvements,” he comments.